Corporate net debt set to rise as companies spend piles of pandemic cash

Global corporate net debt will rise to as much as $600 billion this year as they begin to spend some of the piles of cash built up during the pandemic, according to research by asset management firm Janus Henderson on Wednesday.

Companies borrowed a record $1.3 trillion last year but took a cautious approach to spending it, which left them sitting on some $5.2 trillion in cash, Janus Henderson said. .

As a result, total debt soared 10.2% to a record $13.5 trillion for fiscal year 2020, while net debt – calculated as total debt minus cash – increased only slightly to $8.3 trillion.

With the economic recovery, the company expects a boom in capital spending, dividend payments and share buybacks in the second half of this year and beyond.

This anticipated madness will see global corporate net debt rise by $500-600 billion by the end of the year to $8.8-8.9 trillion, according to the study.

However, Janus Henderson said improving credit quality with the economic recovery and supportive monetary policy, despite the prospect of higher inflation, provided investment opportunities.

In particular, high yield debt, dubbed junk bonds, has outperformed this year as it is less sensitive to movements in underlying rates.

“The prospect of higher economic growth and rising inflation…also means improving credit fundamentals – better cash flow, improved leverage ratios,” bond portfolio managers Tom Ross said. and Seth Meyer.

“Yes, debt has increased, but cash has soared, markets are wide open and free cash flow is accelerating, so businesses are on a roll.”

They are betting on the recovery of some of the “fallen angels” of the past year – in other words, companies that lost their investment rating during the pandemic, especially food and beverage companies, like Kraft, and some automakers, like Ford. .

They also predicted that default rates would remain low, perhaps below 1% and only increase slightly in 2022, although they pointed out that sectors such as airlines and leisure were vulnerable.

Ann J. Cox